Friday, July 4, 2014

ACA/Obamacare: “Inconsistencies”, Reverse Tax Cliffs and 04/15/2015 Tax Day Disaster This Way Comes

“The Obama administration is struggling to resolve data discrepancies that could jeopardize coverage for millions who sought health insurance on the federal exchange HealthCare.gov, according to a watchdog report on the still-rocky implementation of ObamaCare. Though the system's troubles have faded from the headlines since the problem-plagued launch last October, a report from the health department inspector general provided the first independent look at widespread issues the government is having effectively fact-checking the information applicants are putting in the system. According to the report, the administration was unable to resolve 2.6 million so-called "inconsistencies" out of a total of 2.9 million such problems from October through December 2013. The government needs to determine applicants' eligibility in order to verify they can enroll and, in some cases, get government subsidies. Without that step, coverage could be jeopardized. Critics fear these issues also could cause chaos during the 2015 tax-filing season, as many would have to pay back subsidy money they were not entitled to.” - ObamaCare coverage for millions in jeopardy as watchdog finds widespread data flaws, fox news, 07/01/2014http://www.foxnews.com/politics/2014/07/01/report-obamacare-data-problems-affecting-millions/

Keeping the above news report in mind for a moment, consider the following:

“Many of the inequities present in Obamacare stem from Section 1401 of the law, which establishes eligibility for subsidized insurance in government-run exchanges.[5] Obamacare’s formulae for allocating federal premium and cost-sharing subsidies include several “cliffs.” At these cliffs, individuals and families will actually benefit more by working less because additional earnings could cause them to lose thousands of dollars in taxpayer-funded subsidies. For example, Obamacare subsidizes insurance premiums for individuals with incomes of up to 400 percent of the federal poverty level (FPL), which is just over $62,000 for a couple in 2013.[6] According to the Kaiser Family Foundation’s subsidy calculator, a married couple, each 50 years old, making a combined $60,000 per year would receive a taxpayer-funded insurance subsidy of up to $5,081.[7] The couple would qualify for this subsidy because their combined income would be just below 400 percent of the FPL. However, if the couple earned an additional $2,500—raising their income just above 400 percent of the FPL—they would receive no subsidy at all. Even though they receive $2,500 more in cash compensation, the couple would actually be worse off financially because they would lose more than $5,000 in federal insurance subsidies. Similar cliffs occur elsewhere in Obamacare’s subsidy structure. As income approaches 400 percent of the FPL, the percentage of income that households are expected to devote to insurance premiums rises, and the premium subsidies under Section 1401 fall. Individuals with rising income also face the loss of federal cost-sharing subsidies established under Section 1402 of the law, which reduce out-of-pocket expenses including co-payments and deductibles. These effects are particularly acute at certain cliffs established in the statute—for instance, 150 percent, 200 percent, and 250 percent of the FPL—but they also pervade the entire subsidy structure. Overall, University of Chicago economist Casey Mulligan has concluded that Obamacare will help raise effective marginal tax rates by more than 10 percentage points.[8]The subsidy formulae in Obamacare and the disincentives to work compound an existing system of tax credits and welfare programs that places families of low and modest incomes in a “poverty trap.” Testifying before two subcommittees of the House Ways and Means Committee in June 2012, Urban Institute fellow Gene Steuerle explained how the phaseouts of various income-linked programs—such as food stamps, housing assistance, and cash welfare benefits under the Temporary Assistance to Needy Families program—create very high effective marginal tax rates.”- How Obamacare Undermines American Values: Penalizing Work, Marriage, Citizenship, and the Disabled, Chris Jacobs, heritage.org, 11/21/2013

Upon Further ReviewThe reverse tax cliffs of Obamacare would likely work the same as marginal income tax cliffs in regards to tax avoidance. Tax avoidance techniques are well known. There are legal tax avoidance techniques and there are illegal tax avoidance techniques. The point being, individuals will rationally avoid tax.For instance, James and Jane Goodfellow face/approach a marginal income tax cliff. The Goodfellow’s could merely take the months of November and December off and earn zero income during those months and avoid the tax cliff. The Goodfellow’s could continue earning income and deploy legal tax avoidance techniques. Finally the Goodfellow’s could continue earning income and deploy illegal tax avoidance techniques such as underreporting of income.Meanwhile, John and Mary Public face/approach a reverse tax cliff regarding Obamacare. The Public’s could merely take the months of November and December off and earn zero income during those months and avoid the reverse tax cliff. The Public’s could continue earning income and deploy legal tax avoidance techniques. Finally the Public’s could continue earning income and deploy illegal tax avoidance techniques such as underreporting of income.Returning to the 2.6 million unresolved “inconsistencies” in Obamacare applications and the 04/15/2015 tax day disaster of many subsidy payments needing returned by Obamacare subsidy recipients: Did Obamacare applicants put the cart before the horse regarding tax avoidance techniques? How so?On the ACA/Obamacare web site it asks a very vague question regarding income: “What is your household's expected income for 2014?” If one answers the preceding question assuming tax avoidance techniques deployed one would give a different answer than if one answers the preceding question assuming no tax avoidance techniques deployed. Consider for a moment that a clever person experiments regarding changing the answer to “income” upon the ACA/Obamacare web site (regardless of the anticipation of tax avoidance techniques deployed and consequential reportable income). By changing the income the person will see the subsidy rise or fall and hence the consequential price required to be paid for a particular insurance plan rise or fall. Is it possible the clever person tells other clever people of their experiment?In the final analysis, are the “inconsistencies” really inconsistencies or merely a product of the ACA application design? Stated alternatively, if one turns loose Johnny Insurance Applicant on a malfunctioning web site with no verification of data input, would one expect “inconsistencies”?

About Me

BS Economics, cum laude, Private and Public Sectors, 1979, West Virginia University, Morgantown, WV.
Undergraduate Minor in General Insurance.
Chartered Life Underwriter (CLU), Huebner School of Economics, American College, 1992, Bryn Mawr, PA.
Life Underwriter Training Fellow (LUTCF), 1986, National Association of Life Underwriters, Washington D.C..
Currently enrolled and completed one half of Chartered Property and Casualty Underwriter (CPCU) from the American College.
38 years insurance industry experience.